More evidence for a Great Stagnation
By Scott Sumner
The government recently estimated that real GDP rose at a 0.2% rate in the first quarter of 2015. Most forecasters overestimated the growth rate, while the Atlanta Fed was pretty close, with a 0.1% forecast. The media pointed to temporary factors like bad weather in Boston and a brief port walkout in LA. But those clearly were not the main issue, as they would not be expected to affect the level of GDP in the second quarter. And if RGDP bounced back to trend in the second quarter, then wouldn’t we expect to see forecasts of roughly 5% growth for Q2?
The latest forecast from Atlanta’s “GDPNow” program calls for 0.9% growth in the second quarter. Of course a lot could change, but so far there is no evidence that slow growth in 2015 merely reflects disturbances that occurred over a few week in February.
Here’s something that is unlikely to occur, but worth contemplating nonetheless. GDP figures are almost always revised, and thus it would not be all that surprising if the final estimate of first quarter growth ends up slightly negative (of course it could also be even more positive.) Let’s say there’s a 1/3 chance it ends up negative. And suppose the second quarter also comes in slightly negative. What then?
In a macro sense it doesn’t much matter whether the numbers are slightly negative or slightly positive. But in a political sense it’s dynamite. Most people regard two consecutive quarters of falling GDP as a “recession.” I’ve repeatedly argued that that view is nonsense, pointing to the phony “recession” in Japan during 2014—a year when it had robust job growth and a falling unemployment rate. (Well, robust job growth for a country where the working age population is plunging at 1.4%/year.) But that’s just me; all the media insisted that Japan had a “recession.”
Just to be clear:
1. I do not expect 2 consecutive quarters of falling RGDP. I’d guess the odds are 5% to 10% of that happening.
2. And even if it did, I would not regard that as a recession. I’d expect the unemployment rate to stay flat.
But as we saw with Japan, what I think doesn’t matter. The media would scream “recession,” and the Fed would be frightened from raising interest rates for many more years. There would be a sea change in how almost everyone thinks about macroeconomics in the US.
Even though I do not expect this to happen, I think it’s quite plausible that we’ll have two consecutive quarters of almost no growth. And that’s almost identical to two slightly negative numbers. It tells me that the evidence for a Great Stagnation is getting stronger every day. In previous posts I’ve speculated that trend RGDP growth in the US may have fallen to around 1.2%, and about 3% for NGDP. Most economists think trend growth is considerably higher, and they may well be correct. But make no mistake, the early data for the US economy in 2015 is quite bad, and even though the last snow pile in front of my house didn’t melt away until mid-April, the economic effects vanished several months ago. There are no more excuses.
PS. None of this should be viewed as absolving the Fed. NGDP grew only 0.1% in Q1, that’s less (in per capita terms) than even George Selgin would recommend. But it’s likely to pick up. My point is that growth is surprisingly slow for a period of falling unemployment. The juxtaposition of falling unemployment and slow RGDP growth cannot be explained in a demand-side model.
PPS. You might wonder if the 3.3% 2015 NGDP growth forecast at Hypermind contradicts my 3.0% trend forecast. Not so, as most people expect this to be an expansion year with some decline in the unemployment rate. Trend NGDP growth covers both expansion and recession years, and is therefore lower than the typical NGDP growth rate during an expansion year.